CMBS: Lower-rated tranche interest provides recent activity

With the pricing of three issues over the past week, the commercial mortgage market has found itself languishing in light secondary flows.

The widely anticipated March blast of underwriting remains just a promise, with nothing in the premarketing stages just yet and ongoing concerns about insurance reform and growing delinquency hindering business. The latter issues are easily mitigated through diversification offered by larger conduits as well as adequate credit enhancement, but even those issues are slow to come out of the blocks.

With the general apathy, spreads in high-grade tranches stayed in a one-to-two basis point range. Triple-A tranches remain at rather tight levels brought on by early-year interest, and the prospect of a deluge of supply will keep those spreads from richening any time soon. Instead, focus of late was on lower rated tranches. Double-Bs are now 50 basis points narrower from year-end 2001, according to Merrill Lynch, tightening by as much as 25 basis points over the last week or so. Of particular interest to the market were the IO pricing levels of the recent First Union conduit.

Pre-market +565-75 basis point spreads to treasuries for the levered IO class narrowed to +535 bps at pricing (see the scorecards at the back of this issue fore more details). The suggestion here is that as borrowing rates bottom out and rate-locks for future deals are put into place, these IO classes will provide substantial upside. For lower-credits, it continues to be a story of CDO demand. And, in general, preference for higher yields outside of corporates continues to drive CMBS demand.

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